How are life insurers coping in LDI storm?

LONDON, Oct 13 (Reuters) - The focus of a gilt market storm has been around pension schemes' use of liability-driven investments (LDI), many of which are highly leveraged.

Life insurers also use LDI strategies in their provision of annuities, which pay a fixed income for life.

HOW HAVE LIFE INSURERS PERFORMED?

Falling markets and a gloomy outlook for the UK economy are eating into insurers' investments.

Legal & General's shares have fallen 18% in the aftermath of the government's mini-budget on Sept 23. Phoenix has fallen 15% and Just Group has dropped 20%.

WHAT DO THE INSURERS SAY?

Legal & General issued an unscheduled statement on Oct 4 to reassure investors about its solvency position.

"Phoenix has a strong capital position and is highly resilient to market movements as a result of our comprehensive hedging policy," a Phoenix spokesperson said.

"Like others in our sector, we have full asset liability matching in place, as required by the regulator, and continue to actively monitor market movements."

Just Group did not use LDI strategies, group communications director Stephen Lowe said.

ARE LIFE INSURERS AS EXPOSED AS PENSION FUNDS?

Analysts say they are not as exposed, thanks to stricter regulation and more modest derivatives exposure.

"The Prudential Regulation Authority has worked with insurers and upgraded the life insurers' liquidity risk management capabilities in the past few years; for example, they have put in place more rigorous liquidity stress testing that you don't see in the pensions market," said James Forbes-King, a principal at Oliver Wyman.

The oversight of the pensions industry is under scrutiny following schemes' catastrophic dash for cash to fund the highly leveraged derivative positions.

Life insurers were more likely to have hedged their positions with physical financial instruments, rather than with derivatives, analysts say.

Fitch analysts say life insurers faced "substantial collateral calls" on some hedge positions but hold "strong liquidity buffers" which should protect them from the market routs.

WHAT DOES THE FUTURE HOLD FOR LIFE INSURERS?

While the drastic rise in gilt yields raised short-term liquidity issues for pension schemes, it also improves their solvency position, as they need to hold less money now to pay future pensions.

This means more schemes are able to afford the cost of insurance through a so-called bulk annuity or pensions buy-out, removing risk from their sponsoring employers' balance sheets.

Insurers including L&G, Phoenix and Just Group, as well as Aviva, Rothesay and Pension Insurance Corp, are major players in the bulk annuity market.

Bulk annuity premiums are likely to reach 30-35 billion pounds this year, according to consultants Mercer.

Next year was likely to see a record for the market, beating a previous record of 44 billion pounds set in 2019, said Andrew Ward, head of risk transfer at Mercer.

Legal & General said in its recent trading statement that it has completed 5.8 billion pounds in bulk annuities this year and the pipeline for the market was "the busiest we have ever seen". ($1 = 0.9060 pounds) (Editing by Sinead Cruise and David Evans)